For years, Doug Noland’s weekly Credit Bubble Bulletin over at Prudent Bear.com has been a must read. This week’s installment, Lehman Moment is no exception (the commentary comes near the end of the Bulletin, scroll down to locate).
Noland draws out the parallels between the Lehman and Greece situations, noting that these two entity’s are merely the weakest links and “catalysts” of crisis as opposed to being the “root cause.”
Noland further argues that an aggressive policy response has done nothing to affect the underlying problem of massive amounts of unsound debt underpinning enormous leverage throughout the global financial system.
Indeed Noland argues the policy response has in fact given the global leveraged speculating community “a new and egregiously profitable lease on life.” The risk as Noland sees it now is that this community is realizing that the jig is up:
My [Noland’s] basic premise is that the sophisticated leveraged speculators have been operating as the marginal source of liquidity – fueling a highly speculative run throughout global risk markets. These players now appreciate that assumptions underlying their bullish positioning in various markets are now in jeopardy. No longer do the policymaking, liquidity and economic backdrops support their aggressive risk-taking posture. This essentially ends the latest cycle of speculative excess, as prospects would appear to dictate more self-reinforcing pressure to de-risk and de-leverage.
A speculative marketplace cannot easily accommodate a move by the marginal liquidity provider to unwind leveraged positions. This challenge becomes only more formidable when a meaningful segment of the speculating community would prefer to reverse long exposure and go short various risk markets. Others will move aggressively to hedge long exposures in the derivatives markets. It is exactly these types of dynamics that transforms what seemed to be highly liquid markets quite abruptly into illiquid problems.
Noland’s analysis provides an excellent summary and description of inflationary and deflationary cross currents that have been driving financial markets in the aftermath of the collapse of the dot.com bubble in 2000, and will likely continue to do so for some time.
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